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Company vs Self Employed

How does it work?

If you want to establish a business in Cyprus, you have two choices of doing so. Either individually or by setting up a company. If you decide to trade as a physical person, then you will be called a “self-employed” person. If, however you decide to trade via a company then you will either be the director of that company and /or the shareholder of the company as well. We will explain the differences below. It is important to understand that a self-employed person trades using himself / herself as the business vehicle whilst a person who uses a company uses a company to contact the business for himself / herself.

 

Self Employed Person – What does it mean?

A self-employed person is an individual who contacts any business directly; i.e. without using a company.

 

A self-employed person can be and effectively must be:

  • VAT Registered
  • Income Tax Registered
  • An employer
  • Do what the company does
  • And many more.

 

So why isn’t everyone trading as a self-employed person? For two main reasons:

  • Legal Protection
  • Tax Purposes

To fully understand these two reasons, we must firstly understand what the company stands for.

Company – What does it mean?

A company is a separate legal entity from the individual who owns it (i.e. the shareholder) therefore under the “eyes” of law the company is responsible for the below and NOT the person who owns it.

 

Company is responsible for:

  • VAT compliance
  • Income Tax compliance
  • Registrar compliance
  • Social Insurance Compliance
  • Litigation, trade law etc.

So effectively the company stands as a shield in front of its owners and it is the legal vehicle which represents its owners, directors and trade business. The law and local governmental departments will know and hold accountable this legal vehicle and not its owners (some exemptions apply).

 

In addition, a company offers the flexibility to:

  • Raise capital
  • Increase the number of shareholders
  • Have other people responsible for running the business
  • Be licensed (certain bodies do not license individuals)
  • And many more.

 

Conclusion:

The main difference between a self-employed person and a company is the legal framework that could protect the owners of the company and the taxation which varies as follows:

Both the company and the self-employed person are taxed on their taxable profits (not turnover) but the Company is being taxed at a flat Corporation Tax Rate of 12.5% whilst the self- employed person at the income tax rate brackets outlined below:

 

FROM (€) FROM (€) TAX
19,500  0% 
19,500  28,000  20% 
28,000  36,300  25% 
36,300  60,000  30% 
over 60,000    35% 

 

 
Company vs Self Employed – Summary of Differences

Main differences between a company and a self-employed persons

 

  • Responsibility against the law

The company and its directors and not the owners of the company are liable in the event of wrong doing with any of the authorities. In the event of the self-employed person, this person is fully liable against the law.

 

  • Taxation

A company pays less taxation than a self-employed individual if its taxable profit is between: Euro 30,000 - Euro 60,000.

 

  • Filing Requirements

A self-employed person may have as much filing requirements as a company if its turnover exceeds Euro 70,000.

This is because audited financial statements should accompany the self-employed person’s tax return which is a requirement for all Cyprus companies.

 

  • Different Social Insurance Payments

A company has employees and pays on top of its salaries 11.5% for Employers’ Social Insurance. The self-employed person has the same but the individual himself also pays social insurances quarterly at predetermined tax rates.

 

  • Ownership

The company can easily be owned by various parties via the introduction of share issue of capital, a simple and fast process. On the contrary the self-employed person cannot have new owners. Rather if there is such a need a partnership or a company must be formed to cover this gap.